How We Find Quality Businesses – Video Transcript

ROSS ANDERSON:

Hi Fools, my name is Ross Anderson. I'm one of the financial planners here at Motley Fool Wealth Management and thanks for joining us today. I'm in the studio with our portfolio manager of the Pro Strategy and our Dividend Strategy, Bryan Hinmon. Thanks for joining us.

BRYAN HINMON:

Great to be here, Ross.

ROSS ANDERSON:

So, we talked in the past about how an idea transitions into ... Potentially getting into one of the Motley Fool Wealth Management portfolios, and you talked about business quality. I wanted to peel back even further and get into how we look at business quality and what are those main components you guys are looking for.

BRYAN HINMON:

Sure. Well, assessing quality is quintessential to what we do. It's actually the most important thing that we do. Our core investing belief is that independent research conducted with a long-term mindset can outperform. The independent research piece of that belief really comes down to the fact that we are going to do our own work, looking through our own lens and that lens is of business quality. And so it's where my team starts when we're analyzing an idea.

So, through our decades of combined experience in the industry, we've come down to four key pillars that we think encapsulate business quality and give a business the best chance to generate stellar returns over time. And those four components are, management, culture and incentives, the economics of the business, the competitive advantage of the business and then a sustainability piece.

The sustainability of those three vectors, which is really where our team sort of puts on our futuristic hats, looks forward 10 years and tries to make an assessment of those three vectors as well, to determine if the company's going to be in a stronger position, the same position, roughly, or worse position.

ROSS ANDERSON:

Fantastic. So, as you're looking forward, how do you put yourself in that mindset to really try and see the future, almost, in terms of how consumer trends and behaviors and all of those things might be shaping up?

BRYAN HINMON:

Yeah honestly it's encapsulated by the idea of mosaic theory. Our team is looking at many companies every day, trying to put together maybe disparate pieces of information that tell a story and inform our opinion. Really, I think, the place to start is to understand that it's not just me that's trying to do all of this work, it's my team of six. And our team of six is blessed with cognitive diversity. We all have different backgrounds, we all have different college degrees and different life experiences and so we bring a different vision to every company, a different lens to every company, to be looking and making those assessments.

ROSS ANDERSON:

One of the things we talked about was the incentives and the leadership teams. What's one of the ways that you look at that?

BRYAN HINMON:

Sure. Well, I think I learned this lesson - that management and incentives are important - back out of college. After my first job, I quit that job and started a hedge fund with a friend of mine. It's funny, this made me realize that anyone can start a business. And ultimately, what mattered, what drove the decisions of the success and strategy of the business, was people. So, often times it's very easy to think of a business as this monolith, this larger than life entity, when really what it is, is a collection of people.

It wasn't until I went through running a business myself, where it became very personal, where you appreciate that the reason someone's doing something is very important to whether or not it's going to succeed. What their motivations are affects their ability to motivate employees and get the most out of them. And that trickles down through the business and I think you now see more and more people starting to pay attention to some of those qualitative factors like culture.

Another great piece of that is - given The Motley Fool focuses a lot on culture here and it's certainly true in Wealth Management and Asset Management, our sister companies - we have a particularly insightful view into that, because it's been core to our business for the last 25 years. And so we think we have an advantage in making some of those softer skill assessments.

ROSS ANDERSON:

Fantastic. Well, thank you for sharing some of your perspective with us today. If you have questions about the Motley Fool Wealth Management program, support@foolwealth.com is the email where you can reach my team and I. We'd love to hear your feedback on our new video series. Thanks for watching and Fool On!

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